A balance sheet accounts for every dollar a company spends or makes throughout a financial year. The balance sheet for your company gives indications to the performance of your business and lists obligations that could affect your bottom line. For public companies, the balance sheet is essential for investors who are interested in buying stock or giving resources to the company.
The balance sheet shows the nontangible and tangible items that make up the company's value. The assets on the balance sheet that are tangible include "physical" items that you can see. For example, any inventory that is used to create company products, equipment used in manufacturing or buildings are considered assets on the balance sheet. Cash is included in this list of physical assets owned by your company. Additionally, any intellectual property (intangible assets) developed by your company in the form of patents, copyrights or trademarks is calculated in the assets. Intangible items are given an estimated value.
Company liabilities can be thought of as "debts" on the balance sheet. The balance sheet shows what your company owes to others in the form of cash, goods or services. Any loans that your company takes from a bank or financier are considered liabilities, as are outstanding sums owed to suppliers or building owners. Future liabilities that your company owes include payroll to employees and estimated material costs for producing your product. If your company has investors, any dividends that you pay during the year are included in this total.
Shareholder's equity -- if your company has shareholders -- is calculated as the money that would be left over if you sold all of the tangible and nontangible assets the company owned and settled outstanding liabilities. Company stocks are usually based off of shareholder's equity, and dividends -- monetary increases of shareholder's equity over a given period -- can be paid to shareholders on a recurring basis. On the balance sheet, you usually list the outstanding shares of stock or equity owed.
The footnotes section of the balance sheet explains special circumstances concerning the assets and liabilities. For example, if you want to make a note about how the depreciation on your tractor is calculated through the financial year, you would write this in the footnotes section. Footnotes serve to remind the company accountant and officers about balance sheet items that they could possibly forget. Also, if your company is audited, auditors can look to the footnotes for additional information.